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Age 55 No-Penalty Withdrawals From 401k Plan

As we all know in general you can’t withdraw from retirement accounts before you are 59-1/2, otherwise you’d have to pay a 10% penalty. If you retire early and you want to use the money in retirement accounts before you are 59-1/2, there are some exceptions such as withdrawing contributions and, after 5 years, conversions from a Roth account, and setting up 72(t) substantially equal periodic payments.

There’s also a special rule that only applies 401k-type plans, not IRAs. If you retire when you are 55 or over, you can withdraw from the 401k plan and not owe the 10% penalty. As we go into the details, we see this special rule isn’t that useful after all.

Must Retire At 55 Or Later

In order to take advantage of the special rule, you must terminate your employment with the company during or after the year you are 55. You can’t retire earlier and just wait until you are 55.

Only From That Company’s Plan

Say you retire at 55 or later. Only withdrawals from that company’s plan are penalty-free. If you have money with your previous employers’ plans, and you left those employers before the year you reached 55, you still have to pay the 10% penalty if you withdraw from those plans. If you did a rollover to an IRA, withdrawing from the IRA before 59-1/2 is still subject to the 10% penalty.

A workaround could be to consolidate your retirement account money into your employer’s plan, terminate after 55, and then take withdrawals from that plan. That assumes this employer’s plan accepts rollovers from other plans, and possibly from IRAs.

Only If The Plan Allows Partial Withdrawals

Even if you meet the previous two conditions, you can still be thwarted if the plan doesn’t allow partial withdrawals. Many plans only want to do full withdrawals. You can ask for a cash out or you can ask for a rollover, but it has to be 100% of the account balance. In that case, if you ask for a cash out, you won’t owe the 10% penalty but the full balance will be taxable at once. If you do a rollover, as soon as the money gets into the IRA, you lose the special exemption on the 10% penalty.

Because of these limits, the special rule on age 55 penalty-free withdrawals from 401k-type plans actually isn’t that useful. Things must line up really well for you to take advantage of it, and it’s only applicable for a handful of years — when you are between 55 and 59-1/2.

Because you need to cover many years after you are 59-1/2, I believe if you must touch your retirement account money before you are 59-1/2, you really don’t have enough saved. You can forget about all the clever maneuvers to access your money before 59-1/2. Even if you can, you don’t want to, because that money is reserved for years after.

Not worrying about how to take your money out sooner also makes your life much easier.

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Comments

I believe there are many large companies that allow partial withdrawals or rollovers after age 55 so that is not an issue.

Second the thought that you don’t want to withdraw from this 401k prior to age 59.5 is highly mis-guided, again in the case of large companies with pensions, a strategy for a person with a large traditional 401k would be to draw it down and defer the pension and Social Security until much later, thus reducing unwanted taxable withdrawals from the IRA later and building up the guaranteed income of SS and the pension.

I said things must line up really well for someone to take advantage of it and you just gave a case where things line up really well: someone has a pension, retires between 55 and 59-1/2, from a company that allows partial withdrawals, and this person doesn’t have enough money outside retirement accounts to cover the years between 55 and 59-1/2. When you layer conditions upon conditions, you end up with very a small percentage of people who can take advantage of it.

Not so sure pre 59.5 withdrawals are a problem, even with plenty of after tax funds available. My goal is to drain pretax accounts to lower RMDs so that with Social Security and modest pension, don’t get pushed into heart of Social Security tax torpedo. Otherwise would defer a big tax bill that could be averaged out at much lower tax rates. Idea being to fill the 15% bracket, then top off with aftertax.

Steve – If you have plenty of after tax funds, you can just do Roth conversions to fill the 15% bracket and reduce future RMDs. You would spend the after-tax funds. That way you are not limited to retiring at 55 or only the money in the plan from which you retire. You can do it at 53, with money in your IRA or in a previous employer’s plan.

I agree. I retired at 56 with 34 yrs service at the same company (i.e. only have one 401k) After 26 yrs of service, my defined pension stopped accumulating as my company transitioned to matching 401k, like most other companies. I have a substantial 401k nest egg and can draw my pension now so I decided to retire. I did not make the decision lightly though – I did alot of research and consulted my Financial Advisor to ensure all my “ducks were in a row”.

Additional exceptions for qualified retirement
plans. The tax does not apply to distributions that are:
From a qualified retirement plan (other than an IRA)
after your separation from service in or after the year
you reached age 55 (age 50 for qualified public safety
employees)

So you need an early birthday then for 59-1/2… Just prior to or on June 30 (or maybe July 1st) would be optimal. You could retire on Jan 1st at 58 (and a half)… 🙂

If you have your 59th birthday after July 1st, you’d be stuck until the next year, unfortunately, that’s my case. (… I had also–as a young boy in California, a big car driving state, many years ago now–actually calculated by the age of 10 or 11 that my 16th birthday would fall on a weekday, so I’d be able to get my Driver License immediately!)

You’d have to terminate yourself but still maintain the plan, but by maintaining the plan you are saying you are still the employer (employing whom?). If you have your wife as a participant you can terminate her in the year she’s 55 and let her withdraw from her account. I don’t know how you can do it with your own account.

It seems to me that this is still a good idea for tax management purposes – someone who has sufficient non-retirement funds after separation for living expenses could withdraw from the 401k each year up to the limit of a low tax bracket (e.g., 15% bracket). Is a 401k withdrawal considered “earned” income, such that it could be used to contribute to a Roth IRA?

If someone doesn’t need the money to spend, this rule doesn’t give any special advantage over just rolling over to a traditional IRA and converting a portion of the traditional IRA to a Roth IRA, or leaving the 401k money alone and converting from an existing traditional IRA. Either way you will be able to fill the low tax brackets. You don’t have to wait until you are 55 or limit yourself to only doing it with a particular plan.

Income from 401k withdrawal or Roth conversion does not count as compensation for the purpose of contributing to an IRA.

It would. At 59-1/2 you can do the full withdrawal and roll it over to an IRA, from which you then take partial withdrawals at will. You don’t have such option at 55. You’d have to resort to setting up 72(t) substantially equal periodic payments from your IRA.

if my spouse quit her company in January 2016 at age 55 and had $90,000 in a company sponsored 401k, could she take out the money over a three year period ($30,000 per year) and not have to pay a penalty each year or would she have to withdraw all of it in the year she was 55 years old ? In other words, would she be penalized and have to pay the 10% fee in the 2nd and third years ?

The way I understand it, it all depends on your/her particular 401K plan. So, in this case, you would need to speak with your spouse’s 401K provider. I think they will either allow her to withdraw amounts periodically at her discretion (with no 10% penalty) or they will require her to take it all at one time, at which point you/she may very well be subject to higher taxes due to being thrown into a higher tax bracket (but again without a 10% penalty).

Robert,
I would be very careful about your wife taking any money out of the 401k without checking with the plan administrator and even then I would double check what they say with a tax attorney. The issue is you did not say your wife retired from the company, you just said she quit, which is two different things. If a company has an early retirement at age 55 then they most likely have a way for you to take distributions without the penalty. However not all employers have this option. In that case your only other option to remove money without penalty is by what is called IRS rule 72t. This essentially requires taking out substantially equal payments for a minimum of 5 years.

Hi, I am 57,retired 3/2017 from P.O. would like to buy Mobile home cash is my only option from my 401k. & need to take 1/2 of it. I also receive pension. and working part time at new job so I have other income to live on. Am I able to do this without penalty? Thank you!

These are qualifications for a hardship withdrawal, which is subject to tax and penalty but you don’t have to be 55 or separate from employment. If you qualify for age 55 separation, you don’t have to give any reason for the withdrawal.

Right, although there’s a senate proposal to change that 457b rule, so that makes me wonder if at least 457b would then have age 55 rule making it equal to the others (rather than not even having that, making it even worse). I realize you don’t have a crystal ball of course.

I terminated employment on 12/7/2016 knowing I had 60 days to repay a 401k loan or it would be treated as a distribution. I thought the age 55 was in the year that the loan default was treated as a distribution. On 12/7/2016 I was 54. On 8/15/2017 I turned 55. In May 2017 the loan was treated as a distribution. Did I miss the 55 exception by 24 days? What is the process if I wanted to see if the IRS would make an exception due to missing it by 24 days, for the early withdrawal penalty. This is around $4000.

Age 55 is tracked to the date of termination, not the year of distribution. You have to terminate after age 55. You can’t terminate earlier and just wait until you are 55 before you take the distribution.

I’m age 55 and plan to retire taking advantage of Rule 55. My 401k money is intended to get me to age 59 1/2, and then I’ll use my IRA’s. My company 401k plan does allow partial withdrawals that can be adjusted each year. The only problem with this plan is my current company is now being acquired by another one. They most likely will terminate the current 401k plan, and convert everyone to the new. Unclear what will happen if you’re not employed at time of acquisition, but guessing old plan would force a complete withdrawal or rollover. Not ideal for me, so thinking it might be best to wait and become employee of new company, and hope their plan allows for partial withdrawals. Thoughts?

I’m self employed and my wife has a small part time job. She’s 60, I’m 56. We file a joint tax return…..would I have to pay a 10% penalty to take out IRA money (since my wife is over 59 1/2)? Or would the account need to be in both our names?

The ‘I’ in IRA stands for Individual. An IRA is always only in one person’s name. If she withdraws from her IRA there’s no penalty because she’s already 59-1/2. If you withdraw from your IRA there may be a penalty because you aren’t 59-1/2 yet.

I plan on retiring in January of 2019. I’ll be 57 in August of 2018. I have a pension with a SS supplement and my pension is pretty good. Would I be able to take out a portion of my 401K to finish my car? I would like to drive it before it is no longer enjoyable to drive an old mustang. According to my HR department I can take money as many times as I would like at anytime after the age of 55 and being retired.

So I guess the better question is should I
consider my bonus and vacation pay as paychecks – should be about 12 weeks pay
take out 24 weeks worth from my 401K (no penalty)
take out the money for the car from the 401K (no penalty)
defer my pension until week 37 or later to keep my total income lower and raise my overall pension.
deferring my pension would increase it $3300.00 annually.

Your employer already said you can withdraw without penalty after you leave. Whether you should depends on how much you are planning to withdraw for 24 weeks plus the car comparing to increasing the pension by $1,350 every year thereafter.

Thanks for letting me see this in a different way.
I believe I understand now. I need to determine if the amount I would take out could possibly earn that 1350.00 yearly by keeping it in my 401K. Based on rate of return average for the past 3 years I would be losing money by taking out an additional sum to defer my pension.

So the better choice would be to only defer my pension the 12 weeks (for vacation and bonus) and pull out the money for the car. This would only increase my pension by $400 but would leave a substantial amount in my 401K to keep earning!

Would that still be true if you worked for a contracting firm and not directly with the company you left? It seems to happen a lot where I work. people leave, start their pension then come back after 6 months as a contractor with a less than 6 months of availability per year.
I’m not sure if their 401k was frozen since they actually are a contractor and not being paid by the former company. If I run into one of them I’ll ask, but this seems to be the off season for them.

What if I take partial withdrawals from my previous employer under Rule of 55 guidelines while out of work at ages 55 and 56 but take a job elsewhere at 57? Could I still take the partial withdrawals penalty free?

It’s kind of like a wash – plus going forward, not too sure company won’t try to sell off pension fund (union company). I’m not comfortable with them selling and then having to take a reduction as I’ve see with so many other companies lately (UPS, teamsters … etc) …. I’d be too reliant on them protecting me while still trying to unload the administration of the plan.

Using the IRS 55 rule my 401k plan doesn’t allow partial withdrawals. If I transfer the entire amount and give the majority to a new IRA and keep $50,000 to pay down high interest debt will I be responsible for the 10% penalty on the amount I keep?

You do have to leave the money in place but it doesn’t have to be your last employer. Supposed you worked for employer A. You terminated employment with them when you were 56. You leave the money in employer A’s plan. Now you are 58 and you are working for employer B. You can withdraw from employer A’s plan without penalty. If you terminated from employer A at age 53 you can’t. If you terminated at 56 but you moved the money into employer B’s plan you can’t either, because you are still working for employer B.

I wonder if it would be possible to do this deliberately. Find a company that has a 401(k) plan that is decent (low fees), accepts both IRA and 401(k) rollovers, and allows partial distributions. Work there for 90 days or whatever length is needed to enroll in the program. And then once the rollover(s) hit(s), terminate employment. Or, if you’re less of a jerk about it, work there for a few years.

Or, my wife works for a school district. It’s not uncommon for employees to leave for a few years then come back. She could quit in her 40’s, leave her 403(b) money in their plan, go back at or after 55, and work for one school year. They wouldn’t be upset by that, and it would reset her termination date as you describe in other responses above, so she could start drawing on the money.

According to https://www.goodfinancialcents.com/rule-of-55-early-withdrawal-401k, plans don’t have to allow withdrawals at age 55. They can prohibit them until age 59.5 or 62, apparently. Although the same article also says that you have to take substantially equal periodic payments, which goes against what most articles (including this one) say.

Actually, on second thought, maybe that’s another wording for the “allows partial distributions” rule, since surely they can’t prohibit you from rolling your money out of the plan at any age, i.e. taking a full distribution.

“If you retire when you are 55 or over, you can withdraw from the 401k plan and not owe the 10% penalty.”
Is it strictly the date you turn 55, or the year you turn 55. In other words, if you retire in February at age 54, and turn 55 in October (of the same year), do you owe the penalty? This seems to be unclear in the answers above.
Thank you!

In the year you retire, You have to turn 55 that same year or earlier. So if you retire in February 2019 and turn 55 October 2019 – you can withdraw without 10% penalty…. providing your 401k plan permits it. Some 401k plans do not allow you to withdraw until 59 1/2 regardless of the 55 rule – check with your plan!

Just to clarify I will only have access to the contributions made by myself at this company / or matched by my current employer if I were to quit today the year that I will turn 55 in September? I have a portion of it rolled over from a previous employer, I am guessing I would be able to keep that in the 401k? Assuming they allow partial withdrawals which I have to check on. In this scenario what if I decided to start working again after I turn 55 or after I take the withdrawal?

At this point you really should direct your questions to the fund administrator and a tax professional. These are very specific and crucial questions that require specific answers. My plan is run by Fidelity and they are wonderful to talk to for information specific to my company’s plan rules. As far as I know, if you retire at 55 and start to withdraw from your 401k, as long as you don’t roll that 401k to your new employer – you should be ok, but that is MY PLAN’s RULES. Again, I strongly suggest that you contact your plan and a tax professional….. finding out that you’re wrong afterwards would be disastrous!

Your employer’s plan controls what you can withdraw after you terminate and whether you can pick and choose the source. If you don’t start working for that same employer again, you are still a terminated employee.

I am 56 and terminated with a company 401 k. In order to avoid a large tax bill with a lump sum distribution, could I rollover a portion of the plan to an IRA PRIOR to taking a 401 k 55 rule distribution on the remaining? Any way possible to get a portion into a tax free shelter prior to distribution?

“A workaround could be to consolidate your retirement account money into your employer’s plan, terminate after 55, and then take withdrawals from that plan. That assumes this employer’s plan accepts rollovers from other plans, and possibly from IRAs.”

Does this mean that an early retiree could theoretically return to work at a new employer (or start a new side hustle with a solo 401k) during the year in which they turn 55, roll over prior 401k plan balances, retire from the new job or side hustle once the rollover is complete, and be able to withdraw from the plan without penalty assuming it allows partial distributions?

Scenario: assume I early retire at age 40 and keep my balance in my company’s 401k plan (which has low fees and good investment options). I don’t touch that money and allow it to grow inside that plan because I have accumulated enough after-tax assets to pay for my expenses until age 55. On my 54th birthday (assuming it occurs in December), I return to the work force and begin working for a new employer or business whose 401k plan meets all the requirements discussed in the article, and roll over my previous 401k balance. Does this mean that starting in January, I can retire from the new employer and begin to make withdrawals penalty free?

I am 56 and have just separated from my company that holds my 401k. I am allowed to take partial withdrawals from my 401k plan without the 10% early withdrawal penalty. I also am receiving a pension from this company as well. Is there a cap or dollar threshold on the amount that I withdraw each year from my 401k that will cause me to end up paying a 10% penalty when I file my 2019 income tax if I exceed the dollar cap?

There is no cap. You pay taxes on the pension and the pre-tax 401k withdrawals. If your income cross a tax bracket threshold, the amount above the threshold will be taxed at a higher rate. That’s just how the tax brackets work, not specific to the pension or 401k.

I will be 55 in June 2019. If I leave my job and my 401k allows this, what if I have outstanding loans with my 401k plan, will those be paid off by taking a withdraw, or will they be penalized being they are outstanding and will this keep me from being able to withdraw without 10%. Can I leave now turning 55 in 2 months?

I will be 55 in October and was just downsized May 1. I have $270K in a 401k. Can I withdraw all or a portion of the 401K? Can I do it in 2019 so perhaps will have lower tax consequences. I am currently receiving unemployment and don’t want to impact my ability to receive unemployment benefits.

When you no longer work there, you can withdraw. Whether you can withdraw a portion as opposed to the entire balance depends on your plan. Taxes on withdrawing the whole $270k will be very high. Check with the state on whether your withdrawal will affect your unemployment benefits. It’s probably better to wait until you are done with receiving unemployment benefits before you withdraw. Either way the withdrawal will be taxable, on top of your wages so far and your unemployment benefits. You only avoid the 10% penalty when you use the age 55 rule. If you have other ways, don’t withdraw.

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